Things you need to know.
– Stocks gained on Friday – Confused about today….
– Bonds steady, Oil up and through resistance, gold ticks higher.
– It’s all about Friday’s PCE data…what will it show?
– Kashkari reminds us that everything is on the table.
– ECB to cut rates next week.
– Try the Pork Chop Pizzaiola
Welcome back…….Stocks closed a bit higher on Friday’s anemic session – ahead of the long weekend….And while we got some stronger economic numbers (Durable Goods, Cap Goods Ordered & Cap Goods Shipped & Kansas City Fed Services) all that continue to suggest a strong, robust economy along with higher rates, We also got one number that appeared to be the focus of the day…the U of Mich 1 yr. inflation expectation number – it was expected to be 3.4% down from 3.5% and it came in at 3.3%! And that’s about it…..this is what the algo’s focused on…which makes no sense really, since the other economic numbers suggest strength which continues to suggest higher for longer…but it was a Friday in the summer of 2024…..Volumes were low….and as such moves can be exaggerated.
By the end of the day – the Dow gained 5 pts, the S&P up 37 pts, the Nasdaq gained 185 pts, the Russell up 22 pts, the Transports up 74 pts, while the Equal Weight S&P gained 45pts.
So, it appears that stocks rose because the ‘consumer tempered expectations’ about where inflation is headed and what the FED’s next move is, not because there is hard data that shows that… (to be fair – while the data continues to be mixed, the trend is UP and not down). The sense is that apparently the ‘consumer’ (that’s you and me) is not as concerned about the trajectory because they are about to slow spending and if they slow spending then demand forced inflation should also ease….and if it eases, guess what the FED does? Cuts.
Now last week – Goldman’s CEO Davey Solomon came out and said that he sees ZERO chance of a rate cut in 2024 and then on Friday – Goldman Economist Jan Hatzius – said that ‘they moved their forecast for the FED’s first rate cut to September from July…. And while that sounds confusing, remember – Davey is NOT an economist and so his comments were his comments – apparently not reflective of Goldman or the Economics Department at 200 West St, NYC.
In any event – the group noted that recent comments from the differing FED officials ‘suggested that a July cut would likely require not just better inflation numbers but also meaningful signs of softness in the activity or labor market data’ – apparently those economists think that is coming, causing them to suggest a September cut, while the rest of us heard something different…. suggesting no cuts until sometime in early 2025. I mean – the FOMC mins were fairly clear…. ‘many’ of the members are concerned about simmering inflation – in fact the mins said that ‘while participants assessed monetary policy was well positioned various officials mentioned a willingness to TIGHTEN further if warranted’.
Now, what I keep telling you is that 5.25% rates are not high (yes they are high vs. zero, which was not normal, but they are not high historically) and the markets can function – and have functioned quite nicely during this time… Look – it was May 2023 when the FED pushed rates to 5.25% and since then the S&P has advanced by 29% – so where exactly is the struggle with 5.25% rates?
Company earnings are resilient and forward guidance has been strong since then…This season, we have seen more than 80% of companies report ‘better than expected’ numbers while offering fairly upbeat guidance and this is with 5.25% rates…. But here is what I think is getting lost in the narrative – while inflation is now getting baked in (and consumers are numbing to rising prices) earnings calls are mentioning it (inflation) less and less – even though it is still running at 3.4+%….and the fact is that producers/manufacturers continue to push out higher costs to the consumer….and I think that is what we are going to see in the June CPI read on June 12th….after the much hotter PPI read 2 weeks ago. Recall – when prices rise at the Producer level, they then tend to rise at the Consumer level during the next cycle (because producers push those hikes onto us), So, all I’m saying is – stop focusing on if the FED is going to cut at any specific date and focus on the plan – if they do and if they don’t.
Now this week will bring us the latest PCE deflator – the FED’s favored inflation gauge and so expect to hear all kinds of commentary around what this will mean for the FED and you know how they are going to set it up…..the rate cut guys will be out in force – interpreting the data as soft suggesting that the FED has no choice but to cut….PCE m/m is expected to by +0.3% and +2.7% y/y (unchanged vs. last month) while CORE PCE is expected to by +0.2% (down from +0.3%) m/m and +2.8% y/y (unchanged over last month).
But, overnight in Europe – Minneapolis FED President Neely Kashkari told the Barclay’s Int’l Monetary Policy Forum – that EVERYTHING in the US is on the table – including rate hikes…. And that ‘many more months’ of weakening data is what he needs to see before he sees a rate cut…. (which is what JJ has also been saying). (And again- define ‘many’). He was not dovish and has not been dovish in his commentary, but since the rate cut, groupies don’t want to hear that, they are trying to change the focus, look here not there!
In any event – we are not in the concentrated Magnificent 7 market any more….breadth has broadened out and broadened out significantly and that is both good and bad for the markets….we have about 68% of S&P trading above their 200 dma’s…..and that is a positive, but by the same token – investors may feel that prices are indeed reflective of current conditions causing buyers to be patient and more selective causing sellers to become more aggressive – which will put some downward pressure on prices…….It’s a contrarian signal, but it is a signal….Which again speaks to not trying to pick tops and bottoms, but rather focus on the plan….
The VIX which surged mid-week last week, has since retreated again and is now trading at 12.40……. which puts us back in the ‘no fear’ category….and no fear suggests higher prices…. coincidentally – futures are UP this morning….but again all we need is just one unexpected headline to disrupt the place…and it won’t be in any of today’s economic data – but it could become more of an issue by Thursday when we get Retail Inventories +0.3%, Pending Home Sales, but I think it will be on Friday when we get Personal Income, Personal Spending and the PCE Deflator report. And again – remember, we are now in the summer season, Fridays tend to be slower volume days and moves tend to be more exaggerated…. which speaks to what? The PLAN!
Bonds didn’t do much – the TLT rose by 0.3% while the TLH gained 0.25%. The AGG up 0.1%. The 2 yr. bond yield is 4.92%, the 10 yr. bond yield is 4.46% – unchanged over last week.
Oil came under pressure last week – trading as low as $76.15 on Friday only to close the week at $77.72 – just above the trendline resistance. This morning – oil is up 1.30 (1.65%) at $79 as traders await a bevy of indicators…..FED comments, inflation data and of course production policy out of OPEC+ – which is coming on Sunday, June 2nd…- The jury is out….Will OPEC+ maintain current policy or will they cut further? Many now expecting oil to retake $80/barrel as expectations of the ongoing current production cuts out of OPEC+ and the beginning of the summer driving season here in the US…. Any further production cuts will surprise markets and send oil higher. We are now on the north side of what was trendline resistance ($77.54) – leaving us in the $77.54/$81 trading range.
Gold has come off of the recent surge that saw it trade as high as $2477/oz as rate cut bets heated up….….on Friday we tested trendline support at $2347…..which represents a 5% decline…and this morning it is up $12 at $2369/oz as the debate rages on….Again, Friday’s PCE data will be the focus….with everyone pushing their own books….those that want gold to go lower are betting on rate hikes, while those that want it to go higher are betting on rate cuts. We are in the $2347/2477 trading range. My sense is that they will try to push gold up by repeating the rate cut narrative.
US futures are mixed…. Dow futures – 46, S&P’s up 5, Nasdaq +45 and the Russell is up 8. The chatter today will be about Kashkari’s latest comments and Cleveland’s Loretta Mester’s comments in Japan but remember – she is a LAME duck…she is out in June…. NY” s Johnny Williams will be speaking at the Economic Club of NY on Thursday and then we will get the PCE Deflator on Friday. A weaker than expected PCE Deflator number will certainly cause the algo’s to go nuts…and push higher…. while a stronger number will put some downside pressure on stocks. My sense is that we are in the 5,170/5,340 trading range.
European markets are weaker…. France down 0.6% while Italy is down by 0.1%. Which is a bit curious since 2 ECB officials are calling for rate cuts at the meeting next week…. (which apparently seals the deal). Eurozone inflation is expected to hold steady at 2.4% – marking the 7th straight month of sub 3% rates…. Olli Rehn saying that ‘the time is ripe’ to cut rates in June…. oh boy…. We’ll see.
The S&P closed at 5304 – up 37 pts…. This morning – futures are teasing higher and lower…not sure what to do….Like I said, I think we are a bit toppy here, so I continue to look for a pullback – not a crash, just a nice healthy pullback…..2.5% takes us back to short-term trendline support (5,172) while a 4.5% pullback takes us to intermediate trendline support (5,038). Neither of which is an alarm bell…. The alarm bell is a 10% move and that would be 530 pts taking us down and through the long term trendline at 4,157 – something I do not see.
Call me to discuss.
Take good care, 
kpolcari@slatestone.com
Sources: Bloomberg, CNBC, Reuters, Wall Street Journal
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Pork Chop Pizzaiola
Just like its sister recipe – Steak Pizzaiola or Chicken Pizzaiola – this is a hearty, full bodied dish that can be eaten all by itself enjoyed with a glass of Chianti or vino di tavola (table wine) ….no need to go over the top – it’s all about enjoying the moment –
You will need: Thick cut Pork Chops on the bone – (about 3/4″ thick), Olive oil, Oregano, garlic, onions, red and green bell peppers, a can of crushed tomatoes (not puree), some red wine, salt and pepper…. **crushed red pepper flakes (optional).
In a saucepan – heat olive oil and add crushed/sliced garlic and move it around for a couple of mins until it is nice and golden…. add a sliced white onion and julienned bell peppers – turn heat to medium and cover. When the onions and peppers are soft (about 5 mins) add the crushed tomatoes, oregano and *red pepper flakes. Turn heats up and bring to a quick boil then reduce heat to medium. Add red wine (about 1/2 cup) salt and pepper and let simmer and thicken up…. about 10 / 12 mins.
Next – rub the chops with olive oil, salt and pepper – do not drown the chops in oil – just enough to massage the chops and prepare them for the skillet. Heat skillet (high) and add chops (if you have a ribbed skillet this works best) You can sear for about 4 mins then turn over and continue cooking for another 4 mins. Turn heat down to med low – then add the tomato sauce to the skillet – cover and simmer for another 10 mins. This should give you a nice medium chop – If you prefer you can let simmer longer for more well done. When done – remove chops from skillet and arrange on plate. Next – stir the sauce in the skillet pan to deglaze – making sure to scrape the pan for any bits left behind. Spoon sauce over the chops and serve immediately.
Buon Appetito
